Matteo Tonello is Director of Corporate Governance for The Conference Board, Inc. This post is based on a Conference Board Director Note by Baruch Lev of New York University, Christine Petrovits of George Washington University, and Suresh Radhakrishnan of the University of Texas at Dallas. It is partially adapted from their paper “Is Doing Good Good for You? How Corporate Charitable Contributions Enhance Revenue Growth,” available here.

Companies engage in corporate philanthropy for a mix of reasons. Charitable contributions have the potential to increase shareholder value. Nevertheless, executives also make corporate giving decisions based on self-interest. This report provides practical recommendations to companies and boards for ensuring the legitimacy of their corporate giving programs.

Corporations gave approximately $14.1 billion to a wide array of nonprofit organizations in 2009. [1] Despite the fact that almost all companies contribute some money to charity, corporate philanthropy remains controversial. Proponents believe that companies have a moral obligation to assist the communities in which they do business. Critics contend that corporate giving programs consume company resources and, more often than not, further the goals of management rather than the goals of shareholders. Most recently, corporate philanthropy has been labeled “tantamount to theft” and “a tax on shareholders.” [2] The opposing camps find common ground when corporate giving improves shareholder value as well as social welfare.

A preponderance of academic research reports a positive association between socially responsible initiatives and economic success, particularly in recent years. [3] Companies with strong social performance also tend to have strong financial performance. However, a positive association does not establish causation. That is, a positive association between charitable contributions and profits does not necessarily mean that corporate philanthropy serves a legitimate business purpose. In fact, a positive association can result from two very different scenarios:

Prosperous companies have more economic slack (i.e., cash, highly valued shares), which makes it easier to give to charity.

In the first scenario, charitable contributions are an after-the- fact distribution of wealth: higher profits lead to more giving. In the second scenario, charitable contributions benefit the bottom line: more giving leads to higher profits. Corporate giving is detrimental to shareholders under the first scenario but valuable under the second.

Executives should monitor the mechanism by which charitable contributions and profits are related in their business. An economic recovery is a particularly apt time to reevaluate philanthropic spending because managers may again have access to discretionary resources. As discussed below, shareholders may ascribe selfish intent to the corporate giving decisions of officers and directors. It is easy to assuage shareholder concerns and justify giving decisions when contributions do, in fact, further the company’s long-term financial prospects.

Motives for Corporate Philanthropy

This report focuses on corporate philanthropy, which includes direct cash giving, foundation grants, stock donations, employee time, product donations, and other gifts in kind. [4] Corporate philanthropy is one component of corporate social responsibility, albeit an important, highly visible component. [5] The issues surrounding corporate philanthropy apply to a wide cross-section of companies in every industry, from small, family firms to large, multinational ones. Compared to other social initiatives, such as investment in green technology, it is relatively easy for companies to open or close the corporate checkbook in a given year, which makes contributions more variable over time and more subject to criticism that they are simply a waste of shareholder money.

Is corporate philanthropy an opportunistic behavior by executives? Agency theory suggests that managers will take actions that maximize their own utility, even if these actions are not in the best interests of shareholders. An agency relationship arises when shareholders (principals) hire managers (agents) to represent their interests in running a company. The resulting potential conflict of interest has been called the “agency problem.”

Managers are most likely to make self-serving business decisions in companies with excess cash and little monitoring. [6] Corporate philanthropy is one area in which managers often have discretion to use a company’s slack resources independent of business objectives. In particular, because charitable causes benefit from corporate giving, many stakeholders perceive it as a benevolent and unconditionally laudable activity. This perception results in a “halo effect” over corporate philanthropy. The “halo effect” may cause directors to fear being labeled misanthropes if they question giving decisions and may result in less oversight of charitable contributions than other business activities.

An executive can reap personal benefit from corporate philanthropy in several ways. [7] Even when a gift is fully funded with company money, the executive often receives some credit. These awards, honors, and accolades provide the executive with a psychic benefit and elevate his status in elite social circles. In addition, an executive can use corporate contributions to advance his personal preferences, for example, by supporting an organization with his ideological agenda or the pet charity of a family member. Finally, an executive can further his career by using charitable contributions to gain favor with board members. Although the board should be supervising the executive, they may be swayed by corporate gifts in their name to their favorite cause.

While most companies have a community impact or corporate philanthropy function that is ostensibly separate from the chief executive’s suite, officers and directors can still exert influence over the size and direction of charitable contributions as evidenced by the following:

In a survey of 721 companies, 45 percent of respondents answered “personal interests of CEO/board members” to a question about which considerations had the most weight in determining the focus of the corporate philanthropy program. This was the most frequent response. In the same survey, 49 percent of respondents noted that the CEO was involved in making specific funding decisions. [8] An analysis of actual giving data supports these survey results—corporate foundations allocate relatively more funding to nonprofit organizations affiliated with the CEO. [9]

Companies give more to charity when their top executives and board members have social network ties to the business elite in their community, such as belonging to the same country club or serving on the same board of a prestigious cultural organization. [10]

The larger the percentage of stock owned by the CEO, the less money the company contributes to charity, suggesting that when officers are owners they are more focused on the bottom line. [11]

Companies with larger boards of directors are more generous givers, all else equal. Larger boards are generally perceived as a source of social interaction for directors and less effective as monitors. [12]

Is corporate philanthropy a good business strategy? Corporate giving programs can provide a competitive advantage when they are well designed and carefully executed. [13] For example, charitable contributions can increase the name recognition and reputation of a brand or company among consumers. In addition, corporate support of local causes improves the quality of life in communities where the company does business. These contributions help managers build relationships with government officials and community leaders and can reduce regulatory and special interest group obstacles. [14] Moreover, firms can use philanthropy to improve the economic conditions in developing regions with the long-term goal of enhancing the size and quality of their customer base. A commitment to philanthropy also facilitates efforts to recruit and retain talented employees. Finally, contributions can stimulate innovation as grants to universities and other organizations provide companies with new ideas, access to technical expertise, and opportunities for research and development collaboration.

Corporate Giving—Successes and FailuresCrate and Barrel Since 2006, the company has given its customers “thank you” gift cards to DonorsChoose.org, an online charity that connects donors to classrooms in need. The gift cards allow customers to allocate Crate and Barrel’s charitable contributions across various educational projects submitted by teachers across the United States. This partnership has funded 14,500 projects, benefitting 347,000 students. As a result of this initiative, over 36,500 new donors came to DonorsChoose.org from Crate and Barrel, and, on average, customers contributed $0.40 for every dollar redeemed by gift card. In addition, Crate and Barrel benefitted from its improved reputation with customers. For example, following the fall 2007/spring 2008 gift card distribution, sales increased 16 percent for redeemers and 5 percent for non-redeemers. [a]

Tyco Former CEO Dennis Kozlowski created an image as a generous philanthropist. However, the gifts often came from Tyco rather than from Mr. Kozlowski. He played a decisive role in determining which nonprofit organizations received funding from Tyco and was accused of giving $43 million of Tyco’s money in his own name. For example, Tyco contributed $1.7 million to construct the Kozlowski Athletic Center at the private school where his daughter attended and where he served as a trustee. An additional $5 million was given to build a hall named after him at his alma mater. He also used Tyco funds to burnish his image in the Boca Raton community, where Tyco gave $3 million to a hospital and $500,000 to an arts center. [b]

RJR Nabisco Former CEO Ross Johnson prided himself on his ability to influence board decisions. One technique he used to curry favor with directors involved endowing academic chairs in their names or supporting their philanthropic causes using RJR Nabisco funds. For example, when Mr. Johnson wanted to move corporate headquarters out of Winston-Salem, and he needed the vote of a particular director, RJR Nabisco gave $6 million to that director’s pet charity. This use of philanthropy helped Mr. Johnson ensure board loyalty and operate with limited oversight until he eventually became the poster child for corporate greed during his failed takeover attempt. [c]

Microsoft The company encourages employee community involvement in a number of ways, including organized group activities, paid time off for employees to volunteer, and nonprofit board service training. Since 2005, employees in the United States have given over one million hours of their time, and Microsoft has matched each of those hours with a $17 contribution to the nonprofit chosen by the volunteering employee. Microsoft runs its program worldwide, allowing employees from across the globe to use their expertise to meet the specific needs of each geographic location and culture. In addition to assisting the communities in which the company operates, volunteer opportunities may raise morale and hone employees’ leadership skills. For example, after Microsoft announced its volunteer program in Egypt, employee satisfaction increased from 61 percent to 91 percent. [d]

The following evidence indicates that corporate philanthropy is a legitimate and valuable business activity:

Growth in the amount of charitable giving is positively associated with future revenue growth for consumer product companies. However, revenue growth is not associated with future charitable giving for these same companies. This time-series analysis suggests that corporate giving enhances financial performance and is not simply a distribution of profits. Further examination of this relationship reveals that corporate philanthropy increases customer satisfaction, which, in turn, boosts revenue. [15]

Potential employees perceive companies with strong community involvement as more attractive. [16] As a result of corporate-sponsored volunteer experiences, current employees report higher job satisfaction and a greater commitment to their company. Additionally, current employees believe that volunteer programs help them enhance leadership and professional skills. [17]

Corporate giving increases following negative media exposure, suggesting companies use philanthropy to repair damaged relationships with community leaders and other stakeholders. [18]

Compared to other industries, technology companies are the largest funders of educational initiatives and focus the greatest part of their budget for philanthropy on higher education. This focus is consistent with their need for a well-trained workforce as well as their desire to access university research programs. Additionally, technology companies generally have a high proportion of college-educated employees who take advantage of programs that match gifts. Other industries make similarly strategic decisions about the type of recipient to fund (e.g., health care companies provide the most support to health and human service organizations). [19]

The empirical evidence reveals that executives make giving decisions with a mix of intentions. In actuality, some corporate philanthropy is opportunistic behavior and some is good business strategy. The different motives are not necessarily mutually exclusive. For example, a contribution can help a member of top management attain higher social status while simultaneously enhancing the firm’s reputation. Nevertheless, an executive imposes costs on shareholders when he uses the corporate giving program purely for self-interest. Likewise, it is not enough for corporate philanthropy to simply provide a “warm glow” or “good feeling.” Some return is essential for corporate giving to be able to continue in the long run. Thus, making a sound business case is extremely important. The subsequent sections of this report discuss institutional factors, as well as corporate policies, that can increase the accountability and transparency of corporate giving programs.

The Role of Institutional Investors

Institutional investors generally have more resources to monitor and evaluate a company’s operations than individual investors. Institutional investors also have more power through relatively large-share ownership to influence executive decisions if necessary. Thus, institutional investment can serve as a governance mechanism that increases shareholder value and minimizes managerial opportunism. As the level of institutional ownership increases, it is more likely that corporate behavior reflects the preferences of institutional investors.

Recommended Practices for Corporate Philanthropy from the Council of Institutional InvestorsBoard monitoring, assessment, and approval The board of directors should monitor, assess, and approve all charitable and political contributions made by the company. The board should only approve contributions that are consistent with the interests of the company and its shareowners. The terms and conditions of such contributions should be clearly defined and approved by the board.

Disclosure The board should develop and disclose publicly its guidelines for approving charitable and political contributions. The board should disclose the amounts and recipients of all monetary and non-monetary contributions made by the company during the prior fiscal year on an annual basis. Any expenditures earmarked for political or charitable activities that were provided to or through a third-party should be included in the report.

Institutional investors appear able to exercise a governance role over aspects of corporate philanthropy. Institutions should limit any charitable contributions perceived to be managerial perquisites. In fact, some research indicates that institutional investors do curtail high levels of corporate giving. [20] However, the effect of institutional ownership on corporate philanthropy seems more nuanced, depending on the type of institution and the nature of the giving. Perhaps not surprisingly, dedicated institutional investors (i.e., those with long horizons) appear to consider social performance to be more important than transient institutional investors do. [21] In addition, when there is a legitimate business case for contributions, evidence suggests that the level of institutional ownership is positively associated with the level of corporate contributions. [22] This positive association may result because institutions are attracted to companies that have pragmatic giving programs in place or because institutions instill discipline in corporate giving decisions after they invest. In either event, some institutional investors appear to monitor the financial consequences of corporate charitable contributions.

The Question of Disclosure

The most frequently suggested policy to address opportunistic corporate giving is to mandate transparency. [23] Many companies do voluntarily prepare glossy social responsibility reports each year, but these reports generally do not include a complete account of all corporate donations. [24] Members of Congress have repeatedly proposed (but not passed) legislation requiring companies to disclose annually the aggregate amount of contributions to nonprofit organizations as well as the amount and recipient of any contributions that exceed a specified threshold. [25] In addition, some investors have expressed interest in requiring such information. Companies such as General Electric, The Home Depot, Starbucks, Target, and Wells Fargo, to name a few, have all received shareholder proposals in recent years requesting a list of charitable contributions.

Proponents of increased transparency argue that companies have nothing to hide if contributions are being used for legitimate business purposes. Disclosure should deter executives from using the corporate checkbook to support their pet philanthropies and reduce shareholder skepticism about the appropriateness of corporate giving programs. As an ancillary benefit, disclosure may strengthen the company’s reputation as a good citizen with its customers and with the communities in which it operates.

Even if the expense of preparing a detailed account of all contributions is trivial, disclosure is not a costless solution. Other costs can arise from disclosing the information itself. Some companies argue that they will lose an important competitive advantage if disclosure becomes mandatory because philanthropic information is proprietary. For example, if a technology company gives hardware to selected educational institutions, disclosure of this practice may reveal how the company cultivates important customer relationships. This argument becomes less persuasive when mandatory disclosure occurs after the fact on an annual basis (e.g., in the 10-K or proxy statement) or if a competitor is likely to observe the philanthropy before disclosure anyway.

Another argument against disclosure is the fact that contributions to a controversial cause, even for legitimate business purposes, can attract negative scrutiny. For example, a pharmaceutical company may not wish to publicize its support of a research organization that conducts animal testing, even if that support ultimately benefits shareholders.

Special interest groups with their own political agendas often attempt to micromanage corporate philanthropy programs, diverting management’s time and attention from other issues. Under mandatory disclosure, companies might choose to avoid conflict by funding established, uncontroversial nonprofit organizations rather than innovative and potentially controversial ones.

Overall, companies with business-driven philanthropy programs have more compelling reasons to keep charitable contributions private, but, antithetically, the failure to disclose these contributions is perceived as a signal that the company is concealing self-serving behavior by its executives. Companies should carefully evaluate all of the costs and benefits of disclosure before making a decision. At a minimum, they should consider disclosing their policies governing contributions, if not the contributions themselves.

Recommendations

Executives can justify charitable contributions by applying the same prudence to giving decisions that they do to other business activities. This section offers recommendations for increasing the effectiveness of corporate giving and minimizing opportunistic behavior or the appearance of such behavior.

Align corporate giving with business activities

This is the most common recommendation regarding corporate giving, but it bears repeating: a company should establish a flagship charitable initiative that uses the company’s unique resources to address a social problem affecting the company’s competitive context. [26] A well-designed corporate giving program clearly articulates a congruence between the company’s philanthropic activities and its other business activities.

For example, a publishing company decides to focus on combating illiteracy. The company provides cash grants, product donations, and, most importantly, a distinct expertise in developing reading and writing curriculums. Moreover, the publishing company can leverage certain business relationships it already has in place (e.g., suppliers and authors) to enhance the effectiveness of the initiative. The company’s efforts are not only likely to appeal to their current customers and employees but may also increase their target market in the long run.

As discussed in “Corporate Giving—Successes and Failures” (on p. 3), Crate and Barrel successfully partnered with DonorsChoose.org. This success was due in part to the fact that Crate and Barrel was an early mover in allowing customers to allocate corporate philanthropy. A similar program may not be as fruitful for another company because customer-designated giving may not exploit a company’s core strengths or build brand identity.

Establishing a strong link between a company’s identity and its corporate giving normally requires a long-term commitment but should pay off in terms of both financial and social performance. When a charitable cause is aligned with the company’s business, the company likely has the appropriate resources and abilities to make a meaningful social impact. This reduces skepticism about the company’s motives and increases its credibility with stakeholders.

Clarify the role of officers and directors

The board of directors or a committee comprised of directors and top executives should oversee the corporate giving program. Engaging officers and directors at a high level in setting the direction of the corporate giving program helps to ensure a good fit with other business activities, signals that the company is fully committed to community involvement, and reinforces that giving is not a perquisite and should be treated seriously.

Effective oversight includes ensuring that the company’s giving professionals have the resources necessary to implement the company’s philanthropy program and to establish internal controls over those resources. Such internal controls include written policies that define which charitable causes or recipients are allowable and set a maximum dollar amount of contributions that any one individual, business unit, or geographic region can make without additional authorization. These policies should also prohibit executives from accepting return benefits (which can range from a nonprofit magazine subscription to publicized personal credit for a corporate gift). Companies may give top executives some discretionary funds to allocate to the nonprofit organizations of their choice. However, there should be a dollar limit on these funds and they should be evaluated as part of the executive’s compensation contract.

Establish standards of independence for board members

Guidance on Director Independence With Respect to Corporate PhilanthropyNYSE The board of directors must consider the materiality of any relationship between a director and a nonprofit recipient of corporate giving before affirming that the director is independent. In addition, listed companies must disclose any contributions made by the company to a nonprofit organization in which an independent director serves as an executive officer if those contributions exceed the greater of $1 million or 2 percent of the nonprofit organization’s revenue.

NASDAQ A director is not considered independent if he, or a family member, is an executive officer of a nonprofit organization which receives contributions from the company that exceed the greater of $200,000 or 5 percent of the nonprofit organization’s revenue. Contributions made under a matching gift program do not count towards the $200,000 or 5 percent threshold.

A potential conflict of interest arises when a company provides substantial support to a nonprofit organization affiliated with a company board member. Companies should remain aware of stock exchange rules about the effect of corporate giving on director independence. (See box below for specifics.) To avoid the appearance of any conflict of interest, many companies have established even stricter standards than those required by the exchanges. For example, some companies disqualify a director from being considered independent not only if he is an employee but also if he serves as a director or trustee of a nonprofit organization that receives substantial support from the company. Companies should also consider how independence rules might affect oversight of their corporate-sponsored charitable foundation. Because most corporate foundations receive virtually all of their funding from the company, an otherwise independent director of the company could potentially be disqualified if he also serves as an officer of the corporate foundation. [27]

Measure financial and social performance

Companies must demonstrate that their corporate giving programs increase shareholder value and social welfare. To do so, they must implement procedures to systematically measure and evaluate progress toward economic and social goals. The absence of any performance measurement signals the absence of accountability. Knowledge gleaned from the measurement process is helpful in determining whether to continue, revise, or terminate a particular giving activity and should improve the overall effectiveness of corporate philanthropy.

The financial benefits of philanthropy are often intangible and long-term in nature, making measurement difficult. However, this is also true of other business activities, such as R&D and marketing expenditures. Nevertheless, companies have devised methods to assess the value of these activities and can do the same for charitable giving. Two issues arise in the process of measuring the net financial benefits of corporate philanthropy. First, evidence suggests that, even without opportunistic executives, more philanthropy isn’t necessarily better. There appears to be an optimal level of charitable giving beyond which the company receives no further benefit. [28] Regular measurement will assist companies in converging to this optimal level. Second, the total cost of a corporate philanthropy includes the contributions themselves plus administrative costs, such as the salaries of giving professionals and overhead. Assessing administrative costs over time and comparing costs to external benchmarks will help companies determine whether their level of staffing and organizational structure are reasonable and the giving program is operating efficiently. For example, a recent survey reported that administrative costs are 8.8 percent of total giving on average. [29]

Measuring social performance is challenging, but significant progress has been made in developing tools that companies can use to estimate the societal impact of their philanthropic activities. [30] For example, the Committee Encouraging Corporate Philanthropy has developed a framework that includes procedures for assessing whether individual grantees are achieving the intended outcome as well as procedures for estimating an overall social return on investment. [31]

Given the diversity of corporate giving programs, there is no “one size fits all” approach to evaluating the effects on social welfare, and companies must individually determine which metrics best suit their needs. But overall, companies should consider the following steps for effective oversight:

1. Approve an annual philanthropy plan that is consistent with the company’s business strategy.

2. Ensure that appropriate resources are available for the company’s giving professionals to carry out the plan.

3. Implement internal controls to prevent executives from interfering with the plan for their personal benefit.

4. Assess the outcome of the plan.

Conclusion

Expectations for corporate philanthropy are evolving. Officers and directors can no longer treat charitable giving as a peripheral activity or an after-the-fact distribution of profits. In order to make a business case in support of corporate philanthropy, executives should integrate giving with other business activities, institute controls to limit managerial opportunism, and develop procedures to measure and evaluate financial and social outcomes. It is no longer sufficient for corporate philanthropy to simply “do good.” If corporate giving is to succeed in the long run, it must provide a financial return. Acknowledging the economic benefits of corporate philanthropy does not negate its power to alleviate social problems and enhance communities.

[3] Academic research measures social performance in several dimensions, including not only the level of corporate philanthropy but also the impact on climate and the natural environment, product safety and quality, commitment to diversity, workplace conditions, and employee relations. See Noel Capon, John Farley, and Scott Hoenig, “Determinants of Financial Performance: A Meta-Analysis,” Management Science 36(1990): 1143-1159; Ronald Roman, Sefa Hayibor, and Bradley Agle, “The Relationship between Social and Financial Performance,” Business and Society 38(1999): 109–125; Joshua Margolis and James Walsh, People and Profits? The Search for a Link between a Company’s Social and Financial Performance (Lawrence Erlbaum Associates, Inc., 2001); Marc Orlitzky, Frank Schmidt, and Sara Rynes, “Corporate Social and Financial Performance: A Meta-Analysis,” Organization Studies 24(2003): 403–411.(go back)

[4] Corporate philanthropy does not include charitable giving from the executives’ own pockets. For example, contributions from Microsoft are part of Microsoft’s corporate philanthropy program while contributions from the Bill and Melinda Gates Foundation are not.(go back)

[15] Baruch Lev, Christine Petrovits, and Suresh Radhakrishnan, “Is Doing Good Good for You? How Corporate Charitable Contributions Enhance Revenue Growth,” Strategic Management Journal, 31 (2010): 182-200. For a sample of 251 firms from 1989 through 2000, they calculate that, on average, a $500,000 increase in charitable contributions results in an estimated $3 million increase in revenues and an estimated $791,500 in net income.(go back)

[24] Corporate foundations are required to disclose the amount and purpose of each grant on their publicly-available Form 990-PF. However, a company can circumvent this requirement by giving directly, rather than through a foundation. Giving USA (2010) estimates that only 31 percent of corporate giving flows through a foundation.(go back)

One Comment

“It is no longer sufficient for corporate philanthropy to simply “do good.” If corporate giving is to succeed in the long run, it must provide a financial return. Acknowledging the economic benefits of corporate philanthropy does not negate its power to alleviate social problems and enhance communities.”

Well said. I see a sea change occurring in corporate philanthropy in the coming years.

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